Solvency II stance gives Guernsey a captives edge


Solvency II stance gives Guernsey a captives edge

Fiona Le Poidevin outlines how differentiation outside Solvency II and innovative structures continue to set Guernsey apart from the global competition.

In December 2013 the European Captive Insurance and Reinsurance Owners’ Association (ECIROA) voiced its concerns at the way Solvency II had been drawn up. The directive has had its implementation date pushed back to 2016 but, as it currently stands, eight out of 10 European captives would fail to qualify for solvency capital treatment because they carry liabilities underwritten for disposed entities, according to ECIROA.

As a result, ECIROA has written to the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA) to ask them to change the rules. If they do not, then ECIROA believes many captives will be forced to close or move outside the EU to escape the onerous capital and reporting requirements required under Solvency II.

This is exactly why Guernsey announced it was not seeking equivalence under Solvency II back in January 2011. We declared our stance as early as possible because we wanted to give current and potential clients certainty and clarity regarding the regulation of insurance business in Guernsey. The Island stated at that time that applying Solvency II as it was then constructed would burden insurers in Guernsey with additional costs and render currently effective captive business plans uneconomic, particularly as Solvency II was not designed for captives as they have parent companies as their policyholders.

We certainly feel the early clarity we gave in relation to Solvency II has already played a part in the continued growth of our captive sector over the past couple of years. Indeed, a number of Guernsey practitioners have already reported receiving instructions to migrate captives from jurisdictions such as Bermuda to Guernsey, due to the uncertainty created by the delays associated with Solvency II and the requirements for equivalence with the directive itself.

Figures to the end of December 2013 from the Guernsey Financial Services Commission (GFSC) show that there were 89 licences issued last year, bringing the number of licensed international insurers in Guernsey to 758—a net growth of 21 international insurers over the previous 12 months. This clearly demonstrates that captive owners recognise Guernsey’s expertise in the sector. They like our close proximity to London, our efficient and proportionate regulation and that our decision not to seek equivalence with Solvency II had the backing of owners with captives already on the Island.

Insurance-linked securities

Another reason for the recent growth we have seen within our insurance industry relates to the use of protected cell companies (PCCs), incorporated cell companies (ICCs) and associated cells within the increasingly popular concept of insurance-linked securities (ILS). Reasons for the growing attractiveness of ILS as a structure and an alternative asset class for insurers and investors are twofold.

  1. ILS permits an insurer to purchase additional protection for low frequency, high severity losses, including natural and non-natural perils, operating in the traditional insurance market, typically in the form of catastrophe bonds or collateralised reinsurance; and
  2. Investors like ILS because returns are non-correlated with the general financial markets.

Guernsey’s great strength is that it has a long and strong heritage in both the investment funds and insurance sectors, making it the optimum location for ILS. Guernsey pioneered the cell company concept back in 1997 with the introduction of the PCC for use in the captive insurance sector. The subsequent success of this innovation is illustrated by the facts that we’re ranked as the number one captive insurance domicile in Europe and the fourth largest globally, and that the cell company is now used across the financial services world as an alternative application for the structuring of various products.

PCC and ICC structures provide a low cost, low administration vehicle to access returns from the reinsurance market and some ILS funds avail themselves of both within their growth strategies.

Guernsey pedigree

At the time of writing there are in excess of 50 protected cells established in Guernsey across four different PCC platforms having written fully collateralised reinsurance primarily covering property catastrophe risks, marine, crop and other classes such as premium reinstatement or prize indemnity. Protected cells in Guernsey are also being used to conclude swaps and derivatives transactions under International Swaps and Derivatives Association (ISDA) agreements as an alternative to a reinsurance contract.

“Guernsey’s great strength is that it has a long and strong heritage in both the investment funds and insurance sectors, making it the optimum location for ILS.”

In 2012, the Channel Islands Securities Exchange (CISE), formerly known as the Channel Islands Stock Exchange (CISX), became home to the first private catastrophe bond listed on any exchange worldwide when Aon Insurance Managers in Guernsey—which has been involved with more than 80 ILS transactions since 2006—worked with Swiss ILS manager Solidum Partners AG to establish Solidum Re Eiger IC Limited. It is an insurance vehicle which listed bonds with a value of $52.5 million on the CISE and was the first CISE listing where natural catastrophe perils are the underlying exposure for ‘principal at risk’ notes. It also incorporated a dual listing with the Vienna Stock Exchange.

Cedric Edmonds, partner at Solidum Partners and director of Solidum Re Eiger IC Limited, said Solidum Partners selected Guernsey as its jurisdiction of choice for its incorporated cell reinsurance company and private cat bond platform due to the “incorporated cell company legislation and the quality and ‘can do’ attitude of the service providers”.

As Europe’s number one captive insurance domicile, the Island plays host to subsidiaries of global names such as AIG, Aon, Barbican, Catlin, Generali, Hiscox, JLT, Marsh, Old Mutual, Royal & Sun Alliance, SCOR and Willis, as well as independent operators such as Heritage Insurance Management, Alternative Risk Management (ARM) and Kane. The sector is also complemented by banking, investment and fiduciary sectors and supported by a network of professional services, including legal, tax, accounting and actuarial advisers.

The pre-eminence of Guernsey as a captive insurance domicile is underlined by the fact that approximately 40 percent of the leading 100 companies on the London Stock Exchange with captives have them domiciled on the Island. Indeed, a majority of the international insurers licensed in Guernsey have their parent company located in the UK; however the Island’s insurance sector is truly international.

Firms from across Europe, the US, South Africa, Australia, Asia, the Middle East and the Caribbean have all established captives on the Island. BP has its own captive insurance company, Jupiter Insurance, domiciled on Guernsey, as does BHP Billiton through Stein Insurance Company.

The insurance industry in Guernsey has its origins dating back to the 18th century and the Island’s first captive insurance company was incorporated in 1922. Since that time we have continually evolved our offering to meet the demands of our clients. Our response to Solvency II and our adaptability to service products such as ILS through the expertise we have honed in the captive insurance can only enhance our attractiveness as a location of choice.

Fiona Le Poidevin is the chief executive of Guernsey Finance. For more information visit:  

Solvency II, Guernsey

Captive International